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Edited Transcript of TORNTPHARM.NSE earnings conference call or presentation 27-Jan-20 12:00pm GMT

Q3 2020 Torrent Pharmaceuticals Ltd Earnings Call

Feb 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Torrent Pharmaceuticals Ltd earnings conference call or presentation Monday, January 27, 2020 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aman Mehta

Torrent Pharmaceuticals Limited - Strategic Planning

* Sanjay Gupta

Torrent Pharmaceuticals Limited - Executive Director of International Business

* Sudhir Menon

Torrent Pharmaceuticals Limited - CFO

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Conference Call Participants

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* Aditya Khemka

DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare

* Anubhav Aggarwal

Crédit Suisse AG, Research Division - Associate

* Chirag Dagli

HDFC Asset Management Company Limited - Senior Equity Analyst

* Damayanti Kerai

HSBC, Research Division - Analyst, Healthcare and Hospitals

* Fatema Pacha

ICICI Prudential Life Insurance Company Limited - Assistant VP & Fund Manager – Equity

* Hari Belawat

Techfin Consultants Pvt Ltd - CEO and Director of Techfin Consultants Singapore

* Kunal Mehta

Vallum Capital Advisors - Research Analyst

* Manoj Garg

White Oak Capital Management Consultants LLP - Senior Investment Analyst

* Neha Manpuria

JP Morgan Chase & Co, Research Division - Analyst

* Nikhil Mathur

AMBIT Capital Private Limited, Research Division - Associate of Small Caps

* Nitin Agarwal

IDFC Securities Limited, Research Division - Analyst

* Prakash Agarwal

Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to Torrent Pharmaceuticals Limited Q3 FY '20 Earnings Conference Call. We have with us on the call today, Mr. Sanjay Gupta, Executive Director, International Business; Mr. Sudhir Menon, Chief Financial Officer; and Mr. Aman Mehta, Chief Marketing Officer, India Business. (Operator Instructions) Please note that this conference is being recorded. I now hand conference over to Mr. Sanjay Gupta. Thank you, and over to you, sir.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [2]

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Thank you, Stanton. Good evening, everyone, and welcome to our Q3 FY '20 earnings call. I will take you through some of our key financial highlights of Q3 and make some comments on our key markets. .

Q3 revenues were INR 1,966 crore, down by 4% on a year-on-year basis. Q3 revenues of previous year, including -- included onetime patent-related settlement income. Adjusted for this, Q3 revenue is down by 1%. EBITDA was at INR 591 crore, up by 6% on a year-on-year basis. Again, adjusted for onetime impact of patent-related settlement and litigation costs in the previous year, EBITDA growth stands at 13%.

Now some comments on our key geographies. India contributed about 44% of our total revenue in this quarter compared to 42% in the previous year. India revenues stood at INR 871 crore, up by 5% on a year-on-year basis. Adjusted for one-off, the growth is at 8.5%. The one-off pertains to the integration of stocklist of Torrent and Unichem in Q3 FY '19 and the base impact of discontinued products.

As per AIOCD, Q3 growth is at 11.9% versus IP growth of 9.5%. Data is quite similar on a MAT basis. Torrent is showing a growth of 11.7% versus an IPM growth of 9.8%. Q3 has also witnessed the launch of high potential new products from Torrent, such as ticagrelor, vildagliptin and Remogliflozin. These products are off to an encouraging start, and we will share data on these products in the quarters that come.

The number of Torrent brands with revenue of more than INR 100 crores today stands at 9, of which 3 brands at rupees -- are at above INR 200 crores as per AIOCD MAT December 2019. These are Shelcal at INR 451 crores, Nexpro at INR 221 crores and Losar at INR 208 crores. Specialist prescriptions contribute to almost 73% of overall Torrent prescriptions and Torrent stands at the sixth rank amongst specialists as per the SMSRC prescription data set. As of December 31, Torrent PCPM in India stands at INR 7.2 lakhs with a MR strength of approximately 4,000.

Moving on to the United States. In the U.S., Q3 sales were at $51.5 million for the quarter. At the end of Q3, we also had 45 ANDA spending approval with the FDA and also 6 tentative approvals. And of -- regarding our manufacturing facility, there is -- continues to be under OAI. We have submitted our cap action plan and are currently in its implementation phase. We expect an FDA reinspection of Dahej in the middle of 2020. For Indrad and Levittown, you will recall that we had received warning letters in October 2019, and we expect to take about 15 to 18 months from the date of the warning letter for resolution of these matters.

In Germany, our sales were EUR 27 million, down by about 16%. The number of existing and new tender wins have not been impacted. What has been impacted are the product releases from our German warehouse where we have a significant backlog. Torrent has recruited additional qualified personnel to help us accelerate this process, and we expect to return to a regular supply situation by the end of March 2020. Fundamentally, I would like to highlight there is no change in the strength of our German business.

In Brazil, our Q3 sales were BRL 108 million, up by 23% on a year-on-year basis. On a MAT basis close up, which is the equivalent to IMS in Brazil, is showing a Torrent growth of 13.4% versus a covered market growth of 8.6%. Growth is primarily driven by market share gains in branded generics and generic-generic segment. We expect, over a longer period, our internal growth will be in line with the secondary growth rate as reflected in close up. We had also launched a new product in April 2019, aripiprazole, which has shown good growth and is currently reflecting a market share of 14%. Q3 R&D spend at Torrent was INR 110 crores versus INR 135 crores in the last year.

I would like to conclude by saying while Q3 revenues were soft due to certain temporary issues, margin improvement continues. For the U.S., the site resolution work is progressing as per plan, and we continue to ramp up our ANDA pipeline at a steady pace. We expect Germany to be back on track by the end of March 2020.

Stanton, we can open the call for Q&A now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [2]

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Yes. First question on the India growth, if you could split it by price volume and new introductions.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [3]

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Yes. So the India growth volume has been 1.8%, price has been 8% and new introductions has been 2%.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [4]

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So this adds up to around 12% growth as per -- this is as per AIOCD.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [5]

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Yes, as per AIOCD.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [6]

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Okay. And why do you think the company's growth is lagging the AIOCD growth? Why the mismatch?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [7]

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So if you look at it on a MAT basis, the growth is more or less in line. This quarter, what we're seeing is that -- just to again recap from the opening speech, we have completed our final leg of integration from the Unichem portfolio. We've now stabilized the strength of MRs of 4,000. So during this process, certain brands that were shifted or defocused would have some loss of momentum, and these are not going to be future-focused brands. So that's one of the key reasons. And we expect that the key focus brands should, over the next few quarters, neutralize this impact.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [8]

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Okay. But would you not like to call anything specific for the quarter, which has led to a single-digit growth? I mean would the base be the only reason? Or like there are so many events around would -- could have impacted.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [9]

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If you look at the top brands, even the top 20 brands, the external indicators are more or less the same as the earlier quarters. So brand-wise and growth lever-wise, there's been no fundamental change, except some regional impact, which we did see in Q3, but that should -- that was more of a onetime impact, particularly in the north and east.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [10]

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Understood, (inaudible). And secondly, on the new launches, which you talked about, ticagrelor, vildagliptin and remo, so I understand these have just been launched. But what about internal expectations? And would that help us going forward for double-digit growth? I mean what about internal expectation, how much -- how big these brands could be going forward?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [11]

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So, so far, again, it's quite early to comment on how large or how big the market of these brands would be. But the beginning months or few weeks have been encouraging for all 3 of these, particularly for the ticagrelor and vildagliptin. Remo, obviously, there's only 3 players. So let's wait a few months, or by next quarter, we'll have a better idea.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [12]

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And lastly, on the free cash flow generation and debt reduction, if you could just update it.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [13]

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No. So I think, Prakash, we are on track. So I think by 31st March 2020, we should be -- in terms of net debt to EBITDA, we should be below 2% is what we had indicated earlier as well. So that's pretty on track.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [14]

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Okay. Which means net debt of how much, sir? What are you assuming there?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [15]

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I don't have the numbers right now. But I think in terms of percentage, I think we should be around 1.8% kind of a number.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [16]

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And next year, you had given some number last call about INR 900 to INR 1,000?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [17]

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Yes. Yes.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [18]

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Net debt reduction. That is also on track.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [19]

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Sure. Yes.

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Operator [20]

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The next question is from the line of Damayanti Kerai from HSBC.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [21]

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Sir, I didn't understand what has led to our issue in Germany. Can you please elaborate that?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [22]

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Sure. So in Germany, we've upgraded the SOPs that we put -- have put in place to release products from our warehouse. So we have a quality control lab in Germany as well as we had 2 quality-qualified personnel to release products. But as a result of these upgradation of these procedures for release of products, we have had a backlog. So while we have product lying in the warehouse, due to the new process, we've not been able to release it. So it's a supply-related difficulty. What we have done is we've hired an additional 3 and 4 -- 3 or 4 QPs to accelerate this process, and we expect this to be normalized by March.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [23]

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Okay. So just due to new SOPS, we are seeing this backlog. And as you said, there is no change in the fundamentals per se.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [24]

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Yes. No change in the number of tender wins that we have on hand as well as on the new tenders that we have won during the quarter. So no, nothing on the demand side. But the problem on the supply side, which is being resolved by the hiring of additional personnel, which are in place today.

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Damayanti Kerai, HSBC, Research Division - Analyst, Healthcare and Hospitals [25]

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Okay. Sir, last quarter -- this is regarding your Brazil business. So last quarter, I remember you mentioned that now we are taking less of, what you said, tender, and gradually, we'll reduce that. So that continues, right?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [26]

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Correct. So this quarter, the tender business is less than 3% of our business. So the major -- I would say if you look at the split, the trade business is about 92% this quarter, the generics business is about 6% and the tender business is at 2%. On a year-to-date basis, the trade business, we had 88%, the generics are at 6% and the tender is at 6%.

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Operator [27]

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The next question is from the line of Anubhav Aggarwal from Crédit Suisse.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [28]

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Question, Sanjay. Some more clarity on Germany side. What -- what was the trigger for change of -- which required changing SOP?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [29]

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So essentially, it's a -- I would say an audit process, which is done by us internally. So that -- this hasn't been updated in decades. And as a result of what we've experienced in other geographies, we've been in, I would say, internal mission to upgrade everywhere. So we decided that Europe was due for an update. Unfortunately, it leads to a lot of additional work in the country, and we had some difficulties in recruiting additional personnel. And so we felt the full brunt of that in -- I would say in this quarter, and we have new people in place since January. And we expect the backlog to be caught up. But it's -- I will say it's mostly an internal vigilance. And also in consolidation with the authorities in Europe, we felt that there was a need to upgrade ourselves.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [30]

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So just to understand it. So you have upgraded the SOPs, and now do you require more person because does this require that whatever inventory you have that needs to be checked against your new SOP, that's why you require more people?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [31]

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There is a enhanced burden of documentation, and there is a higher threshold of documents that will be required from all our suppliers. So Torrent is just one of the major suppliers for the German business. We also have a lot of third party contracts, where we represent more than 15 companies in Germany for their products. So yes, overall, there is a higher level of requirement to release products in Germany.

And I think we are at the forefront of this. And we've taken this bull by the horns, and we are tackling with it. You might -- other companies are experiencing or would experience a necessity to upgrade the European procedures in the quarters that come.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [32]

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Okay. Useful. But this has nothing to do with the serialization thing which industry went. So this is completely separate than that.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [33]

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Yes. I think we resolved that issue. But unfortunately, we were working on this, and this came to the forefront in Q3.

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Anubhav Aggarwal, Crédit Suisse AG, Research Division - Associate [34]

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Okay. I have another question on the Indian market. Just want to understand the comment on the press release. There talks about the growth is -- adjusted growth is higher because of the base was higher because of the integration of Torrent and Unichem stocklists in Q3 FY '19. Just some more qualitative commentary will be helpful here.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [35]

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So a number of -- last year, quarter 3, when we had done the stocklist integration, there was a first-time billing which was done, let's say, for TPL products to ULL stocklist, which were not common, and for ULL products to TPL stockist. And therefore, the sales were a little higher than the historical trend, which we had between quarter 2 and quarter 3. So that impact is what we are talking about, the impact of stocklist integration. Because what typically happens is quarter 3, you do a first-time billing, and that is neutralized in the subsequent quarters.

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Operator [36]

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The next question is from the line of Neha Manpuria from JPMorgan.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [37]

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Sir, on the India growth. If I were to look at the 8.5%, there was a comment in the previous quarter that the one-offs that we are seeing because of discontinued product will start coming off gradually, which would imply the growth rate should improve, adjusted for all one-offs. When do we go back to a normalized quarter in the India business? Would it be fourth quarter? Or would it take a couple of more quarters to go back to the double-digit growth momentum?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [38]

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So the discontinued impact should be much smaller in Q4. And then from Q1, it will be all like-for-like growth.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [39]

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Okay. So is it fair to assume that we go back to double-digit in -- starting FY '21?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [40]

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Yes. That's what we hope, Neha.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [41]

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Okay. And sir, in terms of the underlying business, is there any part of the Unichem portfolio that you think requires additional work by the way of improving growth?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [42]

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So, so far, what we've seen is that the out of the top 10 brands, almost all of them have turned to a positive growth trajectory, and that's with a much more concentrated field force. So it's a matter of time that the customer base is aligned and that should then start showing above-market growth rates. So we're doing pretty much replicating the exact Torrent-based model in the Unichem portfolios as well.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [43]

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And by growth, do you think you'll be able to see higher-than-market growth? Would this be a couple of quarters or it would be more gradual?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [44]

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It would be a few quarters. But many products we already are seeing very strong traction, like Unienzyme, Vizylac, which are in this 32 -- rather, Unienzyme is now almost INR 100 crore. Vizylac is a INR 50 crore brand. Now so as these brands pick up more momentum, that should add to the overall portfolio as well.

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Operator [45]

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(Operator Instructions) The next question is from the line of Hari Belawat from Techfin Consultants.

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Hari Belawat, Techfin Consultants Pvt Ltd - CEO and Director of Techfin Consultants Singapore [46]

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This is regarding U.S. FDA inspections. You said the Dahej unit, you have OAI. And then in November, notice was issued for this Levittown unit in Pennsylvania. There are also some water problems. CGMP problems, that is also a problem. And then -- sorry, Indrad unit also, there is -- in October, there's a letter for that and that the same unit was issued OAI in August 2019. Sir, what is the status on, I think, U.S. FDA observations in all the manufacturing units?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [47]

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So we have observations in 3 units. And overall, (inaudible) 5 units, which are approved by the U.S. FDA. So as I indicated, that we expect the Dahej OAI, reinspection, to be in the middle of 2020. For Indrad, the 2 events you mentioned is actually a part of the same. So the OAI led to the warning letter in October 2019. And same for Levittown also, there was a warning letter in October 2019. And now what we expect is, from the warning letter, for about 15 to 18 months before the facilities come back to a normal status.

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Hari Belawat, Techfin Consultants Pvt Ltd - CEO and Director of Techfin Consultants Singapore [48]

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And does it affect our exports to U.S. because of these observations in -- U.S. FDA observations? Are only new approval getting affected? What is the status on that?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [49]

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Correct. You're right, only new approvals get affected. Current products are not impacted.

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Operator [50]

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The next question is from the line of Manoj Garg from White Oak Capital.

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Manoj Garg, White Oak Capital Management Consultants LLP - Senior Investment Analyst [51]

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Aman, so this is largely on the domestic market. Again, if you look at over the last 2 quarters, our volume growth has been in the range of around 3% to 4% while, historically, I think volume growth all used to be high single-digit kind of thing. So is there anything structurally changed in the domestic market? Or how do you see this volume growth coming back to the -- to historical level?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [52]

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No. We don't see any structural change. In fact, if we compare our volume growth to the IPM, our volume growth is at 1.8% versus the IPM growth of 1.4%. And again, further adjusted for discontinued products, our volume growth is 2.8%. And sequentially, this has been in the same range. So the double-digit IPM growth is seeming to be stable.

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Manoj Garg, White Oak Capital Management Consultants LLP - Senior Investment Analyst [53]

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Yes. But like -- even for the industry also, if you think that the volume growth has been around early single-digit of 1% to 2% kind of range, so which is far lower than what it used to be in the past.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [54]

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Yes. But no structural change, at least for our portfolio that we're seeing.

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Manoj Garg, White Oak Capital Management Consultants LLP - Senior Investment Analyst [55]

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Okay. Okay. The second thing, Sanjay, regarding sartan, which we started supplying a few quarters back. How are you seeing the ramp-up up there? And are we now still doing the restricted supply or we have gone full-on on that?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [56]

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No. We are continuing with a very restricted supply. So we are not planning to ramp these up currently.

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Manoj Garg, White Oak Capital Management Consultants LLP - Senior Investment Analyst [57]

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And is it like we are still not comfortable with the API? Or what could be the range for that?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [58]

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I mean the essential reason is that the -- we are going through our remediation processes on our facilities. And so we've decided that it is not worth increasing our exposure to this sartan market, at least until we get 2 things. One is further clarity from the FDA, what their expectations are, whether they require a higher level of, I would say, dedicated equipment or cleaning requirements for sartan. And also, we would like to focus on our M&A efforts. So in the big scheme of things, we are not focused on sartan right now.

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Manoj Garg, White Oak Capital Management Consultants LLP - Senior Investment Analyst [59]

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Okay. And when are you going to offer our U.S. facility for the reinspection (inaudible) post the (inaudible)? Any timeline on that?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [60]

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Yes. Just Dahej, sometime in the middle of 2020, and the others would be more towards the end of 2020 calendar year.

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Operator [61]

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Our next question is from the line of Nitin Agarwal from IDFC Securities.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [62]

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On the U.S. side, do we -- given where the plants are, what are our expectations on new product launches for FY '21?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [63]

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Very [moist]. So we will have just, I would say, a single-digit launches, a few coming from our derma facility in Pithampur. And if we get the liquids facility back on track, we would expect 1 or 2 launches from there. So yes, not much expected from new launches in FY '21.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [64]

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And on the base, how should you see -- should we look at the base now from here on over the next few quarters?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [65]

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So generally stable to declining. We should not expect growth.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [66]

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Okay. And on the India business, when we look at the business in terms of the next year, 2 to 3 -- to get 2 to 3-year view of the business, how should we look at that business 100, 150 basis point, 200 basis point higher than the market, in line with the market? What is the broad structure view on our portfolio growth?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [67]

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Yes. It should be a few basis points above the market as has been in H1. And as we are able to ramp up the new launches from this quarter and Q4, that should further add to momentum.

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Operator [68]

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The next question is from the line of Fatema Pacha from ICICI Prudential.

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Fatema Pacha, ICICI Prudential Life Insurance Company Limited - Assistant VP & Fund Manager – Equity [69]

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So I have a question on the India piece. I know we wouldn't give the slate. But because we've done the defocused piece, can we say that the ex Unichem business has grown at some x rate and Unichem is flattish or something like that? Is that how it is?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [70]

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No. There's been no difference like that. It's been about the same.

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Fatema Pacha, ICICI Prudential Life Insurance Company Limited - Assistant VP & Fund Manager – Equity [71]

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Okay. No, because you said of the Unichem stocklist, I'm assuming the entire hit would have come on the Unichem piece, right? The [slide] portfolio of Elder and Torrent were impacted because of this change.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [72]

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No. Which change you're talking about?

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Fatema Pacha, ICICI Prudential Life Insurance Company Limited - Assistant VP & Fund Manager – Equity [73]

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The stocklist, you spoke about the rationalization of stocklist and...

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [74]

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No. It's more of integration of the stocklist rather than rationalization. So TPL stocklist would be more -- would be getting ULL products, right? And compared to...

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Fatema Pacha, ICICI Prudential Life Insurance Company Limited - Assistant VP & Fund Manager – Equity [75]

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So you are saying even the Elder portfolio and the margin would have got impacted because of this change?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [76]

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Yes. I would say the base business.

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Fatema Pacha, ICICI Prudential Life Insurance Company Limited - Assistant VP & Fund Manager – Equity [77]

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Elder base business would have got impacted. Okay, fine.

And sir, second question is you've taken an 8% price hike. Would that be a norm as we work for next year's double-digit revenue growth? Because I'm unable to understand that if this year, if I see the first 9 months reported numbers, it's around this 7%, 8% and on average, an 8% price hike volume growth, so practically 0 for next year. And if we do 5% volume growth in absence of a good high single-digit price hike, we don't reach the double-digit number. So are you seeing any price volume equation on the market right now? Like we are hearing about the genericization in general causing that headwind on the branded drugs.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [78]

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So we've not seen any impact of price related or price sensitivity in almost the entire portfolio. And so the IPM average price growth has been in the range of 5%. So that is what the industry norm is anywhere prevailing. So next year, it's difficult to say what the number would be. But we don't see price as the reason where -- or rather the reason for a slowdown in volumes or a reduction in volumes from the previous year.

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Fatema Pacha, ICICI Prudential Life Insurance Company Limited - Assistant VP & Fund Manager – Equity [79]

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So you hope that next year you recover the volume so that you can report a double-digit revenue growth with a 5% price hike. Is that the math?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [80]

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Yes. So basically, there are 3 components, right? So we're talking about the base volumes going up. The second factor is the new product introduction playing out, and the third is the price. So all put together, yes, I mean, there should be a double digit.

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Operator [81]

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The next question is from the line of Aditya Khemka from DSP Mutual Fund.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [82]

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Sir, on the U.S. market, so you -- Sanjay, so you mentioned that you're going very cautiously on sartans, yet sequentially, I think, we gained about INR 35-odd crores in revenue from the second quarter to the third quarter. So what's driven that? I don't think we launched anything materially new this quarter.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [83]

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So I -- we have not launched anything new. It's just, I would say, increased share of the existing basket of products. So as of today, we have 15 products in the U.S. where we are #1 in terms of share, another 15 products where we are #2. So I would say that commercial performance on the existing portfolio continues to deliver, and that is the main reason behind what you see as a $50 million-plus base of sales that we have.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [84]

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Okay. So given that it's driven by market share gains and better volumes, this 54 number in the absence of any major disruption in terms of pricing should be sustainable?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [85]

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Minus the price erosion that you see every year.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [86]

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Minus the base business price erosion, and which you are saying is, what, MSD, mid-single-digit every year?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [87]

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Yes. Absolutely.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [88]

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That's your expectation, right? Okay.

Secondly, on the gross margin side. So slightly -- so about 72.7 being our average of the last 3 quarters or the 9 months for FY '20, anything one-off in this that you would like to call out? Or is this like a run rate? Because we have gained almost about 100 basis points year-over-year, first 9 months of FY '19 versus first 9 months of FY '20. Anything you think is a one-off in here to call out? Or you think this is sustainable run rate as far as gross margins are concerned?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [89]

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Yes. I think it's sustainable. Aditya, if you remember, quarter 1, I indicated that the new normal looks like between 72% to 73%. And yes, I mean, we have been doing between 72% to 73%. So this, I would say, is quite probable, unless something else comes up later on.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [90]

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Sure. Sure. Appreciate that. Also, if I look at the other cost items this particular quarter, so I'm looking at employee expense, I'm looking at R&D, even other expenses, so employee was down year-over-year, R&D was down year-over-year and the 2 -- 20% down and then your other expenses were low single-digit growth. So a lot of cost control, it seems. So is it like a permanent cost-saving program that you guys are running, which is leading to efficiencies? Or this is just like a lumpiness of the expenses being incurred in this quarter and next quarter will be sort of back to a normal growth.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [91]

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So you're right. I mean the employee costs have come down by INR 4 crores compared to the previous quarter, and that -- I think we carried out some rationalization, as what Aman said, right? I mean, the last leg of rationalization. So that is contributing to that.

The second is on the other expenses. There are some reduction because of the variability of the revenues being lower. And you're right, I mean, the R&D expenses being lower compared to the previous quarter, so this has contributed to the lower expenses.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [92]

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R&D, therefore, would go back up because your full year budget -- I think -- you remember discussing about INR 500 crores. So would that sort of R&D go back to that sort of a budget?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [93]

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Yes. So what we're seeing is actually, I mean, some amount of efficiency is coming in, in terms of what we had estimated in terms of the R&D cost. But there are cases where there's a slight delay or pushback, which is getting into the subsequent quarters. I would say both, put together, should be 50-50 is what we are seeing now.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [94]

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Okay. Okay. And therefore, from what you said in employee cost in terms of the negative growth or the decline, I assume it's structural because you've laid off a few people. So the cost decline is structural, but your other expenses seems to be more linked to the revenue. And therefore, whenever the revenue picks up, the other expenses will probably go up as well.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [95]

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That's right. That's right.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [96]

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Right. Any guidance on CapEx for next fiscal of FY '21?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [97]

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So FY '21, I think it should be only maintenance CapEx to the tune of INR 300 crores.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [98]

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Maintenance Capex. And what's our first 9-month CapEx in FY '20, please?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [99]

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Should be roughly INR 200 crores, yes.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [100]

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INR 200 crores.

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Operator [101]

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The next question is from the line of Chirag Dagli from HDFC Asset Management.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [102]

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Sir, there has been some talk about trade margins, trade margin caps and that this will likely be therapy by therapy. So any broad thoughts on how this will pan out? Is there any discussion with the industry? What are your broad thoughts around this?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [103]

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So as of now, still unclear how and when it would be rolled out, but we did see the oncology pilot. So we would not be surprised if it was similar. It would be similar to that.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [104]

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So ETB by therapy, sir, is it clear understand?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [105]

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Hard to say. But overall, if you see -- again, just to clarify. The trade margin rationalization would not impact us because we're not present in the trade generic space.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [106]

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I understand. So -- but there should be some ruboff effect, right, on the branded companies.

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [107]

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So overall, branded volumes should end up gaining from the trade margin rationalization.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [108]

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Correct. Okay, okay. Fair point. And when do you think you will get clarity around this?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [109]

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Not certain yet.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [110]

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Okay. Okay. And on R&D, sir, with all these facilities having issues, how does this change our R&D effort, if at all?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [111]

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It doesn't change at all. So whatever R&D is happening is happening for the future, right? So we are on track as far as the projects concerned, yes. So there's no pushback as far as R&D is concerned.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [112]

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So what is the reason for this -- for the first 9 months? If one sees, this has broadly been tracking lower than your typical guidance of 7% to 8%.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [113]

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Yes. Yes. So as I said, there's some amount of efficiency, which we are seeing in terms of the cost, better cost coming in. And as I said, at least in quarter 3, I see certain pushback in projects, which is likely to get spent in quarter 4 or quarter 1.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [114]

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So as we go along, should we assume 7% to 8%? Or should we assume a lower number?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [115]

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No, I think it should be around 7%, Chirag.

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Chirag Dagli, HDFC Asset Management Company Limited - Senior Equity Analyst [116]

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7% in -- for FY '21 as well.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [117]

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Yes. That's what we hope.

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Operator [118]

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The next question is from the line of Nitin Agarwal from IDFC Securities.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [119]

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Just a housekeeping question. I see on this other income, this would be largely hedging gains for us.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [120]

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That's right, yes.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [121]

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And why would they be so meaningfully different in this quarter because there's not been much movement in the currency, right?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [122]

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No. It's not between the quarters, right? I mean, so we do a 12 months forward can -- considering the credit period, the contract period would be between 12 to 18 months. If you go back 18 months, no, you'll find the differences in the rates, the spot rates, which were existing. So the premium basically is around, let's say, 4% to 4.4% for the last 1.5 years is what I've seen. And therefore, if you consider for 18 months, it should be roughly 6% over and above the spot rate when we had taken those hedges.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [123]

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Okay. Okay, got it. And likewise, if you can sort of just guide us to the tax rate for this year, next year?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [124]

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Yes. This -- it should be roughly between 20% to 21%. Next year, also, I believe it should be roughly maybe 23% to 24% is what we expect.

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Operator [125]

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The next question is from the line of Prakash Agarwal from Axis Capital.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [126]

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Yes. Just one clarification. You spoke about the MRs being rationalized even in this quarter. So -- and you mentioned 4,000. The last number was 4,200. So 200 people?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [127]

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That's correct.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [128]

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Okay. And so this would be the margin level going forward, right? I mean, as you pick up 10% plus growth with similar MRS, this would be -- so is it fair to expect a 50 to 75 basis points margin improvement next year?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [129]

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So not in terms of number. But logically, what you say makes sense, yes.

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Prakash Agarwal, Axis Capital Limited, Research Division - Executive Director of Pharmaceuticals [130]

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So -- I mean to make sense. I mean would it be fair to assume that in the models? Or how do you think about it? Or there are...

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [131]

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From an overall perspective, Prakash, what we're saying is since 60% of our business is branded generic, there are 2 important levers for margin improvement, right? And considering 60% of the business is branded generic, from an overall company perspective, other things remaining constant, 75 to 100 basis points should be possible.

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Operator [132]

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The next question is from the line of Hari Belawat from Techfin Consultants.

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Hari Belawat, Techfin Consultants Pvt Ltd - CEO and Director of Techfin Consultants Singapore [133]

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Sir, in today's Board meeting, the approval is opting for raising INR 5,000 crores maybe over a period of time in form of equity. What is the schedule for raising such funds? And what will be the utilization of such funds?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [134]

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No. No. So there is no plan for raising funds through QIP. It's an enabling resolution, which we have been taking every year. So the approval is basically for 1 year. So when it expires, we just take enabling resolution so that we can keep active at any point in time.

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Hari Belawat, Techfin Consultants Pvt Ltd - CEO and Director of Techfin Consultants Singapore [135]

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Okay. Okay. Okay. But there should be firm planning during 1 year, at least, that you want these much of funds when you drop fund flow for the whole company. At least things are well known. We need INR 1,000 crores or INR 500 crores or whatever, whatever figure. I mean why we take such a -- for large amount of INR 5,000 crores raising funds.

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [136]

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Correct. So as I said, the -- as far as the cash flow plans are concerned, it's very clear. We're not going to raise it at this point in time because nothing is there in pipeline. And as I said, it's an enabling resolution. So that if some opportunity coming in and we need to look at it, this becomes a lever available for us.

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Hari Belawat, Techfin Consultants Pvt Ltd - CEO and Director of Techfin Consultants Singapore [137]

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Okay. I understand. And sir, one more clarification. In the month of September, some shares, promoter shares to the extent of 36.5% are pledged. Earlier in June '19, it was not there. The -- and where it is done, this pledging of shares of promoter share?

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [138]

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So again, I think it's a wrong information because there's a clarification which was given for stock -- to stock exchange also because of some media coverage. So what's happened is under the takeover regulation, there is a change in the definition of encumbrance, which has been brought in, and which says that even a nondisposable undertaking, if it is given by way of a covenant also, you need to mention it. So most of the lending agreements have this change of control, covenant, which says that the holding will not go below 26%. So there is no actual pledge of shares. It's only a covenant because it comes under the ambit of the definition of encumbrance.

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Hari Belawat, Techfin Consultants Pvt Ltd - CEO and Director of Techfin Consultants Singapore [139]

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Okay. But still in December '19 shareholding pattern BSE, India is also showing same, I mean, 36.5% of pledge. (inaudible)

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Sudhir Menon, Torrent Pharmaceuticals Limited - CFO [140]

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What I request you to do is if you open up, there are certain explanations which have been given under the table. So if you read it, it say that there is no pledge as far as the shares of promoters are concerned. It is because of this nondisposable undertaking, directly or indirectly, has been shown as under that [thing].

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Hari Belawat, Techfin Consultants Pvt Ltd - CEO and Director of Techfin Consultants Singapore [141]

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Okay. I think in future, they will remove it (inaudible) [edited].

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Operator [142]

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The next question is from the line of Nikhil Mathur from AMBIT Capital.

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Nikhil Mathur, AMBIT Capital Private Limited, Research Division - Associate of Small Caps [143]

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My question related to the e-pharmacies, which are finding a bit of traction in Indian market. Now what I understand is that most of the e-pharmacies are still procuring from the traditional stocklist and traditional distribution route. So do you think that the e-pharmacy uptake has kind of unsettled the trade in any ways? And what do you think is the larger picture impact on the pharma companies? Is it likely to impact in any ways the pharma company the next couple of years?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [144]

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No. There has been no impact as of yet. And even going forward, the same channel will have to be followed. So we don't see that structurally changing.

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Nikhil Mathur, AMBIT Capital Private Limited, Research Division - Associate of Small Caps [145]

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But have you seen any e-pharmacies directly approaching you or any other companies for direct procurement or something of that sort, which can kind of give them the scale and then kind of setting the distribution margin that stay in the channel?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [146]

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No, we have not.

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Operator [147]

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(Operator Instructions) The next question is from the line of Kunal Mehta from Vallum Capital.

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Kunal Mehta, Vallum Capital Advisors - Research Analyst [148]

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So any in direction of the business in Brazil for the coming quarters?

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [149]

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So it'll be in line with the close-up data. So like I had mentioned in the opening comments, we're seeing double-digit growth in secondary market data. So we expect the primary sales to catch up. So currently, our covered market is growing on a MAT basis at 8.6% and currently showing about a 13.4% growth. So I expect a double-digit growth to continue reflected there in term of sales.

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Operator [150]

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(Operator Instructions) The next question is from the line of Kunal Mehta from Vallum Capital.

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Kunal Mehta, Vallum Capital Advisors - Research Analyst [151]

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Just a question on the India business. By observing the pricing trends, which we have had in our portfolio since the last few years, what I have observed is that we have been able to take pricing increases in more than IPM. And so what would enable us to take this price increases, so that it's the quality of the portfolio where we can have better price increases in the IPM? Or would you attribute that to any other reason?

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Aman Mehta, Torrent Pharmaceuticals Limited - Strategic Planning [152]

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No. It's, again, market-specific and brand specific. Wherever we feel that the competition scenario enables us to take the price increase, we do so. And again, going forward, it's difficult to say what it would be like in the next year.

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Operator [153]

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Ladies and gentlemen, as there are no further questions from the participants, I would now like to hand the conference over to Mr. Sanjay Gupta for closing comments.

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Sanjay Gupta, Torrent Pharmaceuticals Limited - Executive Director of International Business [154]

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Thank you, everyone, for your interest in our results, and we are available to answer any further questions. Please contact our Investor Relations (inaudible). Thank you.

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Operator [155]

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Ladies and gentlemen, on behalf of Torrent Pharmaceuticals Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.